Court of Appeal provides helpful guidance on construction of W&I policy exclusions

Following the Commercial Court’s helpful guidance on the proper construction of exclusion clauses in warranty and indemnity (W&I) policies in Project Angel Bidco Limited (in administration) v Axis Managing Agency Limited and Ors [2023] EWHC 2649 (Comm), the Court of Appeal has dismissed (by a majority of 2-1) Project Angel Bidco Limited’s (Buyer) appeal and confirmed the Commercial Court’s decision that the “Cover Spreadsheet” containing the warranty schedule is subject to the general exclusions in a W&I policy. You can find the reported appeal judgment here: https://www.bailii.org/ew/cases/EWCA/Civ/2024/446.html.


We reported on the Commercial Court’s decision here: (https://www.howdengroup.com/uk-en/court-provide-wi-exclusion-clause-guidance). The case arose out of the Buyer's acquisition of the entire issued share capital of Knowsley Contractors Limited (Target) and the Sellers’ failure to disclose a police inquiry into conduct that allegedly would fall within the bribery and corruption warranties covered by the W&I policy.  The Insurers declined the claim relying on the exclusion for bribery and corruption.  You can find the Commercial Court’s reported judgment here: https://www.bailii.org/ew/cases/EWHC/Comm/2023/2649.html.

 

Buyer’s appeal – there was an obvious mistake in the policy to be resolved  

This is a case about policy interpretation.  The Buyer argued that there was a mistake in the W&I policy that the Court should correct to remove the contradiction between the bribery and corruption warranties marked as “covered” in the Cover Spreadsheet and the bribery and corruption exclusion contained in the exclusion section in the main body of the W&I policy.  The Buyer asked the Court to correct the exclusion so that the “or” after “any liability” read as “for”:

 

The Underwriter shall not be liable to pay any Loss to the extent it arises out of:

…  any liability [f]or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws.

The effect of this change would narrow the scope of the exclusion so that it would only apply when Loss arises out of liability for actual or alleged non-compliance with Anti-Bribery and Anti-Corruption Laws, rather than allegations alone.

The Court found there was no obvious mistake

The Court agreed that there was an apparent conflict (at least in part) between the covered bribery and corruption warranties and the bribery and corruption exclusion.  Lewison LJ (on behalf of the majority), went on to consider if this apparent contradiction was a result of an obvious error and, if so, what correction (if any) should be made.  Lewison LJ found:

1. That there was not a clear drafting error. [1]  A mistake needs to be common to both parties and it is not difficult to understand why Insurers would not want to cover a loss in share value caused by an alleged non-compliance with anti-bribery laws. [2] [3]
2. Even if there was an obvious mistake, a cure for such mistake is unclear.  Lewison LJ could not discern between amending the exclusion or the Cover Spreadsheet which falls short of the requirement to rectify a mistake that the cure must be clear. [4]

The dissenting judgment

Phillips LJ considered there was a clear inconsistency between the exclusion and the covered warranties and preferred the amendment sought by the Buyer.  The change would resolve awkwardness in the language of the exclusion and facilitates the commercial purpose of the W&I policy which included enabling the Sellers to identify the extent they were released from liability (under the sale and purchase agreement with the Buyer, they were not liable for warranty breaches covered by the Insurers).  Marking the bribery and corruption warranties as “covered” could have misled the Sellers as to the extent of cover when they were asked to approve the W&I policy.

 

Key points for policyholders

• Buyers of W&I insurance should familiarise themselves with the policy as a whole, because the Court considers “…the reasonable reader would surely read the Policy as a whole.” [5]
• Extra attention should be given to the policy exclusions as the warranty schedule is subject to the general exclusions in the policy - even if a warranty is marked “covered” in the warranty schedule.  When considering if the W&I policy resolved the apparent conflict, Lewison LJ referred to the rubric identifying that “… the exclusions were intended to take precedence over the Cover Spreadsheet …” [6] The majority’s decision is in line with how the W&I market intends a W&I policy to be interpreted when drafted.
• Bespoke exclusions and definitions need to be drafted with due care and consideration.  The courts present a high hurdle to retrospectively amend the wording of a commercial contract agreed by sophisticated parties for an alleged mistake.  The point of view of all parties will be relevant for deciding if there has been a drafting mistake.
  
   

Footnotes:

[1]         [2024] EWCA Civ 446, 59.

[2]         [2024] EWCA Civ 446, 52.

[3]         [2024] EWCA Civ 446, 54.

[4]         [2024] EWCA Civ 446, 60-62.

[5]         [2024] EWCA Civ 446, 40.

[6]         [2024] EWCA Civ 446, 49.